Why the Feds Should Have Been Tougher on Google

If you live in west Chelsea or visit the area on a regular basis, Tuesday was your lucky day. Partnering with a local business-improvement organization, Google announced that it would be providing free outdoor wi-fi to an area extending from the West Side Highway to Eighth Avenue, which incorporates part of the meatpacking district, the Fulton Houses, and much of the gallery district. In a press release, Google said that the area would be the first “wired neighborhood” in Manhattan and the biggest contiguous wi-fi network in the city.

That is the “good Google”—the Google that even today, as a global corporation with a market valuation approaching a quarter of a trillion dollars, declares in one of its mission statements: “You can make money without being evil.” Until recently, the Internet giant appeared to be largely living up to its principles. With its nifty free products—such as search and e-mail, Google Earth, and the Android operating system—and its willingness to invest in exciting technologies of the future, such as driverless cars, home-help robots, and real-time economic statistics, the company had managed to avoid much of the criticism that bedeviled dominant technology companies of previous generations, such as I.B.M. and Microsoft.

Google’s latest p.r. (and legal) triumph came last week, when the Federal Trade Commission, after spending a year and a half examining its business, gave it the gentlest of slaps on the wrists for indulging in some anti-competitive practices, and, crucially, found the company not guilty of biasing its search results to hurt competitors. At least for now, the ruling removes the possibility that Google will meet the same fate as I.B.M., A.T.&.T. and Microsoft, which were each subjected to onerous anti-trust investigations after falling foul of U.S. regulators. Eventually, the government forced Ma Bell to break itself up. I.B.M. and Microsoft got off more lightly, but the investigations hobbled them for many years.

Anti-trust cases are complicated, and the Google case is no exception. But the more I read about the settlement, the more I think that the government has gone too easy on Google. As technology giants go, Google may be a pretty benign one, although that is becoming increasingly debatable. (In addition to hobbling some of its competitors—actions recognized but excused by the F.T.C.—it is an aggressive user of offshore tax havens, which it exploits to save billions of dollars in taxes.) But whatever one thinks of Google, the fact is that it’s a quasi-monopoly in the search market and should be treated as one. That is where the settlement fell down.

Rather than formally recognizing Google’s enormous market power in search, and putting the company on notice that its actions will be closely scrutinized going forward, the F.T.C. dismissed the most important complaints about its behavior as the whining of competitors. With the exception of eliciting promises from the company to stop “scraping” content from other sites, grant its advertisers more flexibility, and license its patents more readily, the government gave it a green light to carry on exploiting its dominant position in search as it sees fit, with the sole proviso that it must be able to come up with a plausible explanation—not a persuasive explanation, mind you—of how its actions benefit customers. In an online economy that is increasingly dominated by a handful of “platform” companies that are seeking to establish market positions as dominant as the one Google enjoys, this light-touch approach sets a dangerous precedent.

What was needed, in the first instance, was a clear statement from the F.T.C. that Google is a monopoly or quasi-monopoly. Back in 1999, during the Microsoft anti-trust case, U.S. District Judge Thomas Penfield Jackson issued such a statement, and overnight it changed how Microsoft was perceived. With close to seventy per cent of the U.S. search market, more than ninety per cent of the European search market, and more than ninety-eight per cent of the fast-growing mobile market, Google’s economic power is obvious and palpable to anybody involved in online commerce. But as far as the U.S. government is concerned, this fact remains unacknowledged.

The second thing that the F.T.C. should have done is register more concern about the way Google manages its search engine, which is an essential utility in the online ecosystem. Now, under anti-trust law being a monopoly isn’t a crime: the courts recognize that a successful firm may rightfully earn a position of market dominance. What is illegal is for a company such as Google to use its monopoly position in one market to extend its position of dominance into an adjoining one. This, of course, is where Microsoft got into trouble. The government accused it of trying to leverage its Windows monopoly into the market for web browsers, by, amongst other things, insisting that computer manufacturers pre-install its own Internet Explorer.

Google hasn’t been accused of doing anything so blatantly anti-compeitive, but during recent years it has changed the way it presents search results to favor its own businesses and disadvantage competitors. Perhaps the most commonly cited example is airline tickets. Today, if a user asks for information about airfares between, say New York and Miami, the first non-sponsored link he (or she) sees is a box of flights provided by Google’s own online-booking service. The links to Orbitz and Expedia come below the Google link.

Clearly, this isn’t as egregious as what Microsoft did, which effectively removed Netscape from the desktops of new Wintel computers. People looking to book a flight can still choose to click on Orbitz or Expedia, rather than Google’s service. But in favoring Google’s own products, it clearly undermines the company’s claims that its search algorithm is driven exclusively by popularity and usefulness. Until recently, at least, Orbitz and Expedia were far bigger and more popular than Google’s travel site.

Rather than castigating Google’s actions, or, at the least, making public some concerns about them and promising to monitor them in the future, the F.T.C. absolved the company of any ill intent. “Although some evidence suggested that Google was trying to eliminate competition, Google’s primary reason for changing the look and feel of its search results to highlight its own products was to improve the user experience,” Jon Leibowitz, the F.T.C.’s chairman, said in a statement. In reply to which, I can only quote John McEnroe: You cannot be serious. If there is a single person out there who really believes Google puts its own airfares above the link to Expedia because it improves “the user experience,” I would be surprised.

In fact, I suspect that even Leibowitz doesn’t believe this. A few sentences on in his statement, he got closer to the truth, remarking: “While not everything Google did was beneficial, on balance we did not believe that the evidence supported a FTC challenge to this aspect of Google’s business under American law.” That is a much finer point. In the absence of obvious pecuniary harm to consumers, it is risky to bring an anti-trust suit, especially against a company as rich and lawyered up as Google. Rather than pointing to specific instances of price-fixing, price-gauging, or exclusionary contracts—the sort of evidence often presented in such cases—the government would have had to rely on the vaguer argument that Google’s actions were stifling competition and innovation, which would eventually hurt consumers. A judge might not have bought it.

But even if the F.T.C. decided it was unlikely to prevail in court, there was no reason for it to buckle completely and to close down its investigation of the search engine. Indeed, sound public policy demanded it register a continuing concern. One of the dirty little secrets of the new economy is that it doesn’t operate anything like Adam Smith’s invisible hand. Far from being just one powerless competitor among many, companies like Google and Facebook and Apple have immense leverage, which investors demand they exploit to the maximum extent possible. In Google’s case, it can make or break the businesses of rival online companies, particularly smaller content providers. Of the few restraints on its behavior, perhaps the most effective is a fear of incurring the government’s wrath, which could ultimately lead to the firm being regulated like an old-economy utility.

In saying case closed, the F.T.C. has removed the threat, at least for the next four years. I am not surprised this has led to suggestions that Google, with its twenty-five-million-dollar lobbying campaign and its close links to the Democratic Administration—company employees donated heavily to the Obama campaign and, just last month, its chairman, Eric Schmidt, was rumored to be in line for a cabinet post—rolled the competition watchdog. Whether that is true or not, I don’t know. But the settlement, coming from an Administration headed by a President who likes to quote the great trust-buster Teddy Roosevelt, should have been tougher.